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Doctor of Philosophy(PhD) This thesis consists of three essays examining the behavior of informed traders in
financial markets and how they affect asset pricing. It examines informed traders’ role
in shaping securities prices in three ways. It examines whether on a macro and micro
basis insider traders move prices to a different degree than non-insiders. In addition, it
uses econometric methods to determine what exchange generates permanent price
trends in UK shares. Lastly, it looks at another side effect of fragmentation – how a
‘best execution’ mandate and related market structure changes affect transactions
costs in liquid UK, French, and German shares.
These studies expand on current literature in various ways – extant insider trading
literature has either primarily focused on daily price movement and volume or had
consisted of case studies, the conclusions of which may be idiosyncratic and therefore
unrepresentative of typical insider behavior. The new phenomenon of multilateral
trading facilities (also known as electronic communications networks) and the
proliferation of algorithmic or computer-mediated trading had not been examined in
price discovery papers, due to their relative novelty. In addition, despite a bevy of
literature offering informed insight into the impact of the European Union’s Markets
in Financial Instruments Directive (MiFID), there has been a dearth of empirical
studies assessing its impact on European securities markets. Chapters 2 and 3 examine
MiFID and computerized trading from two different perspectives: that of which trades
lead to permanent prices, and that of transactions costs.
The conclusions drawn in this thesis will be of interest to regulators, market operators,
and traders, as they offer insight into the impact of market structure and how it
impacts informed traders who participate in them.